The Taxation of Recreational Marijuana: Evidence from Washington State

The median United States voter supports the legalization of marijuana, at least in part due to a desire to increase state tax revenues. However, states with legal markets have implemented wildly different regulatory schemes with tax rates ranging from 3.75 to 37 percent, indicating that policy makers have a range of beliefs about industry responses to taxes and regulation. We examine a policy reform in Washington: a switch from a 25 percent gross receipts tax collected at every step in the supply chain to a sole 37 percent excise tax at retail. Using novel, comprehensive administrative data, we assess responses to the reform throughout the supply and consumption chain. We find the previous tax regime provided strong incentives for vertical integration. Tax invariance did not hold, with some types of firms benefiting much more than predicted. Consumers bear 44 percent of the additional retail tax burden. Finally, we find evidence that consumer demand for marijuana is price-inelastic in the short-run, but becomes price-elastic within a few weeks of a price increase.